Turkey Inflation Surges On Food, Weaker Lira Following Coup

By Steve Wynne-Jones
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Turkey Inflation Surges On Food, Weaker Lira Following Coup

Turkey’s consumer price inflation rose higher than expected in July, led by a surge in food prices that gained pace with a weaker lira following a failed coup attempt.

The annual inflation rate was 8.79 percent last month, compared with 7.64 percent in June, Turkey’s statistics institute said on Wednesday. The rate outpaced even the highest prediction of 8.5 percent in a Bloomberg survey, and was significantly above the median estimate of 8.16 percent. Food prices rose an annual 9.69 percent, compared with 6.63 percent a month earlier.

After the botched takeover on July 15, central bank Governor Murat Cetinkaya warned of a temporary “marked” increase in annual inflation that would reverse later in the year. The lira has weakened more than 4 percent against the dollar since the putsch, raising the cost of imported goods. The bank slowed the pace of borrowing-cost reductions, lowering the overnight lending rate by 25 basis points to 8.75 percent on July 19 -- short of the 50 basis-point cuts it delivered during the previous three meetings.

“Cetinkaya’s honeymoon period just ended,” Timothy Ash, a strategist at Nomura International Plc in London, said in an e-mailed note. The inflation data reduces the scope for a further cut, and may also affect a critical credit review by Moody’s Investors Service, he said.

Rating Review


Moody’s said last month that it was reviewing Turkey’s Baa3 rating -- the lowest level of investment grade -- to “assess the medium-term impact” of the failed coup on the country’s growth and policy-making institutions.

If the central bank cuts rates and the lira weakens, that could lead to a “vicious cycle building on the foreign exchange front, which could play into Moody’s concerns on the external financing front” ahead of the Moody’s review, Ash said.

The lira weakened after the inflation data and was trading 0.6 percent lower at 3.0087 per dollar at 10:55 a.m. in Istanbul.

The bank will hold the overnight lending rate at 8.75 percent this year, Capital Economics said in an e-mailed report, removing an earlier prediction for a further cut of 25 basis points.


“The central bank justified an interest rate cut last month by referring to the improving trend in core inflation,” the report said. “The same argument can’t be made now.”

Core inflation, which excludes volatile items including food and gold, accelerated to 8.70 percent, from 8.67 percent in June.

Last month, Cetinkaya maintained the bank’s full-year inflation forecast of 7.5 percent in 2016, dropping to 6 percent next year. It has missed its target for five years in a row, with the goal set at 5 percent since 2012.

News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.

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